Back at the end of 2016 a Kansas bankruptcy judge ruled on this bankruptcy case that included federal student loan debt Educational Credit Management Corporation was responsible for.

This truth is starkly illustrated in the case of Murray v. Educational Credit Management Corporation, which was decided in December 2016 by a Kansas bankruptcy judge. At the time they filed for bankruptcy, Alan and Catherine Murray owed $311,000 in student-loan debt, even though they had only borrowed about $77,000. Thus 75 percent of their total debt represented interest on their loans, which had accrued over almost 20 years at an annual rate of 9 percent.

Judge Somers ruled “the Murrays had sufficient income to pay off the principle of their loan and still maintain a minimal standard of living. Thus, he crafted a remarkably sensible ruling whereby the interest on the Murrays’ debt was discharged but not the principle. The Murrays are still obligated to pay the $77,000 they borrowed back in the 1990s plus future interest on this amount, which would begin accruing at the rate of 9 percent commencing on the date of the court’s judgment.”

ECMC didn’t agree and appealed the case.

The case highlighted the absurdity of the income driven repayment programs to pay off debt when the income based payment is going to be utterly insufficient to repay the debt. In this case the Judge found the accruing interest alone of nearly $2,000 a month was never going to be touched with a qualifying income based payment.

The appeal was finalized on September 22, 2017 by Judge Murguia who upheld the bankruptcy Judge Somers in his determination approving discharge of the accrued interest.

What I find fascinating about this case is the logical hopelessness of requiring a debtor to enroll in an income driven repayment program for federal student loan debt and not give them a fresh start as bankruptcy intended. Why let a debtor continue to linger with a clearly unmanageable debt only to face a future tax liability or heavy yoke for the rest of their lives? The reality is there is no good reason and it seems to fly in the face of the legal intention of bankruptcy for consumers.

On appeal, Judge Murguia stated, “The court also finds that Judge Somers correctly decided that debtors cannot maintain a minimal standard of living if forced to repay their loans in full, but that they could maintain a minimal standard of living if required to repay the principal balance on the loans.” He also noted even at those levels the available monthly income and expense allowed by the court, “does not include funds for emergencies, savings, retirement, or vacations; it only allocates $50 for entertainment apart from home television, and would provide debtors a minimal standard of living.”

Even though ECMC wanted the debtors to enter an income based repayment plan they would never be able to satisfy Judge Murguia agreed with the findings of the original bankruptcy judge, “Judge Somers also noted that although the IBR programs provide for loan forgiveness after 25 years, there is the potential that that forgiveness would come with a large tax liability, thwarting the purpose of providing a fresh start and potentially saddling defendants with a new tax debt in their early seventies.”

The Appeal Judge also made a very logical statement that should be the standard in future cases, “The court declines to make any decision regarding the appropriateness of considering IBRs in other cases. But the court does finds that the IBR plans would thwart these debtors’ chance at a fresh start, under the facts of this case.” And that’s a good standard to shoot for at this time, individual case consideration instead of a blanket denial of discharge.

Finally, Judge Murguia found, “ECMC’s brief argues that none of debtors’ loan, principal or interest, should be discharged, primarily arguing that even though debtors may not be able to reduce interest, they should be required to participate in an IBR plan of some type and pay on their loan. The court disagrees. Under the circumstances of this case, debtors’ payments under an IBR plan are insufficient even to stop the accrual of additional interest, and such payments directly contravene the purpose of bankruptcy. Judge Somers did not discharge all of debtors’ student loans. He discharged that portion—the interest—that had become an undue hardship on debtors, denying them a fresh start. Debtors will still have to repay the principal balance on their student loans.”